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India FX Reserves Drop $7.5B – Rupee Pressure Builds
India's FX reserves dropped $7.5 billion to $681.38B as of May 18. The decline reduces RBI's buffer for defending USD/INR near 85.00, raising hedging costs and option premiums.
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India’s foreign exchange reserves fell to $681.38 billion in the week ending May 18, down from the previous week’s $688.89 billion. The $7.51 billion decline is the largest single-week drawdown in months and shifts the calculus for anyone trading or hedging the USD/INR pair.
The Reserve Bank of India (RBI) has used reserves aggressively this year to smooth rupee volatility, especially around 85.00 USD/INR. A smaller war chest reduces the central bank’s capacity to step into the spot market without accelerating reserve depletion. The naive take is that a drop in reserves is automatically bearish for the rupee. The better market read separates the headline from the mechanism.
Why $681.38B Reserves Matter for USD/INR
India’s import cover – the number of months imports can be financed with existing reserves – slipped with this print. At roughly 11 months of cover, the level remains comfortable by historical standards. What changed is the velocity of depletion. A $7.5B weekly drop implies either large-scale RBI intervention, valuation losses on euro and yen holdings, or a combination of both. If the slide continues into the next two weekly releases, markets will price a higher probability of a steeper rupee depreciation path.
The immediate consequence is a higher risk premium on USD/INR short-dated options. Dealers will widen bid-offer spreads on NDFs (non-deliverable forwards) because the RBI’s buffer is thinner. For a trader, this means the cost of hedging a $10 million INR exposure just went up, even if the spot rate has not yet broken a key level.
Reserve Composition and Revaluation Effects
The RBI reports reserves on a book-value basis, not a mark-to-market one. A strong dollar index (DXY) this May automatically shrank the rupee value of euro and yen positions held in the reserve basket. A rough estimate: if the RBI holds 25% of reserves in non-dollar currencies, a 2% DXY rally could explain roughly $3 billion of the weekly drop. That is a mechanical effect, not intervention. The remaining drawdown likely reflects actual dollar sales to defend 84.80-85.00 USD/INR.
Distinguishing the two matters because valuation-driven declines do not affect the RBI’s firepower for future intervention, while intervention-driven declines directly reduce the ammunition available. The source does not break the numbers into components, so traders should watch for the RBI’s weekly drivers of change note, which clarifies the split.